The government doesn’t have enough money to respond in case the bondholders’ suits prosper in court or if there’s a determination for higher payments to creditors than those contemplated in the fiscal plan.
The situation worsens because the special fund to pay for suits, which the government has kept for years, is also lacking the resources to address these contingencies.
“There are no previsions. The fiscal plan establishes the revenues we should reach in fiscal terms and the expenditures we must make and the service of the debt according to the resources available,” said Elías Sánchez Sifonte, representative of the governor of Ricardo Rosselló Nevares before the Oversight Board, when illustrating the government’s vulnerability to an adverse decision.
Sánchez Sifonte explained that the absence of contingencies or of a “plan B” is because the goal was always to reach agreement with bondholders where payments to creditors were reduced to make it possible to the money to reinvest it in the economy and fund the basic services offered by the government.
“(The fiscal plan) doesn’t contemplate any contingency in the event a suit should come down against the government because the objective was to reach a bona fide agreements, and that meant creating a payment program that would adjust to the Fiscal Plan. This will now have to be done under the Debt Adjustment Plan required under the Tittle III process,” said Sánchez Sifonte.
Currently, the government is burdened with defaults worth $3.2 billion, so it’s exposure to suits is greater. That figure is more than the consolidated budget of the Department of Education in one year. Therefore, to pay for that defaulted money, more drastic economic measures would have to be taken than closing the public education system for a year.
The filing last Wednesday of a petition for territorial bankruptcy under Tittle III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) is the only thing stopping creditors from collecting.
In fact, according to data from the territorial bankruptcy suit, filed by the OB on behalf of the government of Puerto Rico, at least 22 suits, most of these to demand payment on Puerto Rico bonds, were halted starting Wednesday.
Prior to this, suits fought over the legal stay provided by PROMESA during its first months of effect. Said provision expired last Tuesday, a day in which at least five new suits were added to the claims against the central government and its instrumentalities.
The very suits filed by creditors evidence some of the controversies unleashed during the negotiations.
The main complaint was that the certified fiscal plan sets aside, on average, $800 million per year to pay bondholders. This amount is considered “too little” by creditors, given that the figurecovers about 22% of the debt to become due during the 10 year period the plan covers.
Another matter that’s stirring an uproar and which is already the subject of legal suits is the management of the funds intended to pay for the bonds of the Puerto Rico Sales Tax Financing Corporation (Cofina).
Normally, a portion of this tax goes to a trust in charge of honoring payments to Cofina bondholders. This could change, because the certified Fiscal Plan and Law 26 on Compliance with the Fiscal Plan provide for the government to use that money to balance the Treasury.
However, Sánchez Sifonte said this will only happen if necessary. The expectation for now, with the filing of the territorial bankruptcy, is for the negotiation process to continue under the supervision of a federal court judge who will have to endorse the debts’ adjustment in line with the fiscal plan certified by the OB.
“Once a conclusion is reached on the Adjustment Plan for Tittle III, more details will be forthcoming on the future of the debt and the payments,” Sánchez Sifonte said.